M1 (formerly: MobileOne)

[CityFarmer]

Kim Eng Update on M1
Mastering the Art of Prepaid

Please see attached.

[CityFarmer]

Let’s continue with the M1 story. I read Peter Lynch book after I had invested in M1 in year 2010, but the reasoning behind can be perfectly described with Peter Lynch terminology of a “Turn-around” stock.

The followings were the findings during an analysis on Telecom sectors in Singapore which involves Singtel, Starhub and M1, on year 2010

1. Starting from around year 2007, M1’s post-paid revenue is stagnant, even with an increasing subscriber base. It has indicated that M1 is less competitive. If we based on 2010 FR, SH’s ARPU (post-paid) is $74, ST is $86, while M1 is $46 (normalized). M1’s ARPU was almost half of ST.

2. During the same period, M1’s EBITDA margin on service revenue is pretty high among the three, i.e. SH is 28%, ST 46% and M1 43%. EBITDA margin indicated the operating efficiency. A fair comparison is to compare M1 and SH since the size is comparable. It showed that M1 is more efficient than SH in service operation.

A rational conclusion to draw is M1 mobile biz was depressed, although M1 operation was efficient, with similar if not better customer service.

Further investigation showed that it is the market strategy of “bundled service” had depressed the M1 mobile biz. SH had its “hubbing” concept while ST had its “mio” packages, both surfaced around 2007.

Depressed biz means opportunity for a “Turnaround”. When NGNBN plan been announced and commissioned in year 2010, I did feel that a turn-around might happen, with the following reasons

1. M1 has the opportunity to venture into new service product (to both residential and corporate customers) without huge capital investment. If M1 maintains its lean structure and the same efficiency, it should be able to compete and generates sufficient profits.

2. M1 has the opportunity to venture into residential market easily for value-add services e.g. IPTV, interactive TV, Gaming etc.

3. M1 has the opportunity to venture into corporate market easily with managed services, domestic lease line etc.

4. With more service products, M1 will rebound from the mobile services with its own bundled service packages. A release from the depressed mobile biz.

After I was reasonable convinced, I started to invest heavily on M1 since year 2010. More key indicators were observed after the investment

1. In year 2010, M1 completed the acquisition of Qala. The acquisition allowed M1 to venture into corporate market with leased line from ST. It will serves as a spring-board for M1 when NGNBN is ready

2. In year 2010, M1 launched the 1box trial service on leased broadband line from ST. It is an indicator to me that M1 was in action for the turn-around.

3. M1 had maintained its market share, with a reducing ARPU on post-paid segment. When M1 is ready to rebound, the market share will serve as spring-board for M1. It is easier to migrate existing customers than to attract new ones on new platform.

Is the turnaround story convincing? Time will tell me the answer.

From 2010 till now, return on investment is 41% inclusive of dividends. It is only the starting point of the turnaround journey.

[CityFarmer]

Latest promotion from M1 Mega deal

$39/month comes with

- Fiber Broadband 100 Mbps
- Mobile Broadband mData 1GB
- Home Fixed Voice Service
- 12-month 1box rental

This is the latest promotion in today ST newspaper. The soft-copy is attached.

The competition is heating-up. This is the latest and most bundled service M1 had so far.

[CityFarmer]

The latest update of OpenNet legal issue with IDA. The detail is available in today ST page A6

http://www.straitstimes.com/BreakingNews...08978.html

OpenNet had disputed its own AssetCo proposal during NetCo bidding to IDA? I dot not see the different between the proposed AssetCo and the disputed events by OpenNet!

I hope the dispute will not further delay or slow-down the full deployment of NGNBN, otherwise it will become a big drag for M1 biz

[Drizzt]

i wonder if CityFarmer would like to comment on the negative free cash flow.

[CityFarmer]

i wonder if CityFarmer would like to comment on the negative free cash flow.

Thanks for Drizzt comment, otherwise it seem rather odd that i had been talking to myself

Negative free cash flow?

In the last 5 full FY (2007-2011), operating cash flow is around 220-285 Mils, except for 2010, it is 187 Mils

Average CAPEX is around 110 Mils

So we are talking about FCF of approx. 70 Mils - 160 Mils in the last 5 FYs

Anything that i had missed?

[Drizzt]

ah i see. i am mistaken. i should have said not enough to pay the 120-130 mil dividend.

[CityFarmer]

ah i see. i am mistaken. i should have said not enough to pay the 120-130 mil dividend.

It is OK. There is a on-going similar concern on Starhub. Let's look into dividend vs FCF in more detail for M1

FCF (in per share) in the last five (5) FY are
07: 19.3 cts
08: 17.6 cts
09: 11.5 cts
10: 7.5 cts
11: 17.8 cts
Average: 14.7 cts (Total 73.7 cts)

Dividend (in per share) in the last five (5) FY are
07: 2.5 cts (interim) + 8.3 cts (Final) + 4.6 (Capital reduction) = 15.4 cts
08: 6.2 cts (interim) + 7.2 cts (Final) = 13.4 cts
09: 6.2 cts (interim) + 7.2 cts (Final) = 13.4 cts
10: 6.3 cts (interim) + 7.7 cts (Final) + 3.5 cts (Special) = 17.5 cts
11: 6.6 cts (interim) + 7.9 cts (Final) = 14.5 cts
Average (exclude capital reduction + special) = 13.2 cts (Total 66.1 cts)

Summary:
M1 is highly valued by analyst for its capital management. M1 always return excess cash to shareholder whenever feasible via special dividend or capital reduction.

The distribution of dividend is supported either by FCF generated (interim and final dividend) and accumulated profits (special + capital reduction). If base on average number in the last five (5) FY, the dividend distribution is well supported.

IMO, M1 will accelerate its cash generation in the next few years if all goes well, and i will expect more special dividend or capital reduction exercises in the near future

[Drizzt]

i highly doubt that they would be able to accelerate that. they will have to compete with churning.

starhub doesn't have their free cash flow issue. quite well document on my blog that every year they paid out then free cash flow.

the free cash flow is a more appropriate measure unless you tell me part of the capex for m1 is investment not capital replacement

singtel on the other hand comfortably pay less than that.

the reduction and capital management is something that quite possibly not possible any more. if you look at the free cash flow. no free cash flow how to do that. pay out of debts? the reason being that past ARPU is much much better than currently.

[CityFarmer]

i highly doubt that they would be able to accelerate that. they will have to compete with churning.

There are differences on our views. My view is Starhub and Singtel have more to worry with churning than M1.

It is OK, let the time to prove it. Nobody can be 100% right in investment.

starhub doesn't have their free cash flow issue. quite well document on my blog that every year they paid out then free cash flow.

I do not have much insight, but i do hear buzzing words which doubt on Starhub to continue paying their dividend. I might heard it wrongly.

the free cash flow is a more appropriate measure unless you tell me part of the capex for m1 is investment not capital replacement

I agreed. My view is presented base on FCF and dividend, isn't it?

singtel on the other hand comfortably pay less than that.

the reduction and capital management is something that quite possibly not possible any more. if you look at the free cash flow. no free cash flow how to do that. pay out of debts? the reason being that past ARPU is much much better than currently.

I had no doubt Singtel will continue to do well. Singtel is too big to move even with the full benefit from fiber installation in Singapore. Moreover Singtel dominant position in corporate biz will be challenged by Starhub and M1 aggressively.

Current poor ARPU in postpaid is part of the reason i invested into M1 , if you read my previous posting, i am in for M1 partly because its biz had been depressed, and i am anticipating that the depressing postpaid biz will be un-winded in near future. This is part of my story for M1